Cultural distance: key factor to allocate resources towards FDI

In the last few decades, international business (IB) research has made extensive use of the concept of national cultural distance to explain the expansion behavior and afﬁliate success of multinational enterprises (MNEs) (see Shenkar, 2001 for an overview). National cultural distance can be deﬁned as the extent to which the shared norms and values in one country differ from those in another (Chen & Hu, 2002; Hofstede, 2001; Kogut & Singh, 1988).

One stream of IB research that has often included cultural distance as an explanatory variable is that on foreign entry mode choices by MNEs (see Harzing, 2003 for an overview). Most studies in this stream have measured the cultural distance between an MNE’s home country and the target country of the expansion through Kogut and Singh’s (1988) index, which is based on Hofstede’s (1980) dimensions of national culture. Although scholars have become increasingly critical of this index and of Hofstede’s underlying work (e.g., Schwartz, 1994; Shenkar, 2001; Steenkamp, 2001), foreign entry mode studies have continued to rely on them, since little progress has been made in developing reliable choices.

Hofstede (1980) analyzed survey data on work-related values obtained between 1967 and 1973 from more than 117,000 IBM employees working in 40 different countries, and found that four statistically-independent dimensions explained the inter-country variation in employee responses to his survey questions. He labeled these four dimensions ‘power distance’, ‘uncertainty avoidance’, ‘individualism’, and ‘masculinity’, and assigned each country in his sample a score on them that varied between 0 and 100. Power distance refers to the extent to which people believe and accept that power and status are distributed unequally, while uncertainty avoidance refers to the extent to which people are threatened by uncertain, unknown, or unstructured situations. Individualism and its opposite collectivism refer to the degree to which a society emphasizes the role of the individual as opposed to that of the group.

Finally, masculinity and its counterpart femininity refer to the extent to which a society emphasizes traditional masculine values such as competitiveness, assertiveness, achievement, ambition, and high earnings, as opposed to feminine ones such as nurturing, helping others, putting relationships with people before money, not showing off, and minding the quality of life (Hofstede, 1980). Over time, the validity of these dimensions has been conﬁrmed by many studies (e.g., Van Oudenhoven, 2001; for an overview of earlier replications, see Søndergaard, 1994), suggesting that they can reliably be used to classify countries according to their national cultures and to determine the cultural distance between them.

Although Hofstede’s massive and pioneering work has signiﬁcantly increased our understanding of national cultures and the differences between them, scholars have become increasingly critical of this work in recent years (e.g.,Brett & Okumura, 1998; Schwartz, 1994; Steenkamp, 2001). Especially Schwartz (1994) has raised several serious concerns. First, he argues that Hofstede’s cultural dimensions are not necessarily exhaustive, because the survey Hofstede analyzed was not designed to identify dimensions of national culture, and hence may not have contained all relevant questions. Second, he argues that Hofstede’s sample of countries did not accurately reﬂect the full spectrum of national cultures and that adding additional countries could therefore have resulted in other or a different number of dimensions. Third, according to Schwartz, the IBM employees surveyed by Hofstede were not representative of the general population of their respective countries in terms of education, scientiﬁc and technological background, and ‘exposure to modernizing forces’ (1994, p. 91).